Expected utility versus cumulative prospect theory in an evolutionary model of bargaining

Abhimanyu Khan

Journal of Economic Dynamics and Control, 2022, vol. 137, issue C

Abstract: I examine the effect of decision-making processes on the dynamics of bargaining over a fixed pie by comparing the share received when individuals are subject to reference-dependent preferences, loss-aversion, and probability-weighting, to the share they would receive on choosing by maximising expected utility instead. I show that: (i) reference-dependent preferences are unambiguously advantageous, (ii) loss-aversion does not have any effect, and (iii) probability-weighting is unambiguously disadvantageous. Finally, when these three features come together so that the decision-making process is described by cumulative prospect theory, then a higher share is obtained if and only if the advantage conferred by reference-dependent preferences is stronger than the disadvantage imposed by probability-weighting, and I present a precise necessary and sufficient condition that expresses this trade-off.

Keywords: Bargaining; Expected utility; Cumulative prospect theory; Reference-dependent preference; Loss-aversion; Probability-weighting; Evolution (search for similar items in EconPapers)
JEL-codes: C73 C78 D01 D81 D83 D90 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000379

DOI: 10.1016/j.jedc.2022.104332

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